The upcoming changes to the UK tax regime for furnished holiday lettings (FHL), set to take effect in April 2025, will significantly reduce the tax advantages for individuals operating FHL businesses. As a result, those affected are advised to take action ahead of the changes. Here’s a summary of the key points and potential options:

Key Tax Changes from April 2025:

1. Interest Deduction: Currently, interest on loans related to FHLs is deductible from rental income. From April 2025, individuals will only receive a 20% tax credit on interest, reducing tax relief for higher-rate taxpayers.
2. Capital Gains Tax (CGT):
   • Business Asset Disposal Relief (which taxes gains at 10%) will be replaced by CGT rates of 18% or 24%, depending on the taxpayer’s band.
   • CGT rollover relief will only apply in cases of compulsory property purchases after the changes take effect.
3. Capital Allowances: Relief for capital expenditures will be withdrawn from April 2025, although existing capital allowances can be carried forward.
4. Pension Contributions: FHL profits currently count as relevant earnings for pension contributions, but this benefit will be lost, potentially reducing tax relief.

Options for Affected Individuals:

1. Sell Before April 2025: Selling the property before the deadline allows individuals to potentially benefit from business asset disposal relief and avoid higher CGT rates.
2. Capital Improvements: If you’re considering renovations, completing them before April 2025 ensures that capital allowances can be claimed.
3. Transfer to Family: Passing on the property to relatives may allow for the deferral of capital gains, but inheritance tax implications should be carefully considered.
4. Incorporation: Converting the FHL business into a company could provide more favorable tax treatment, but comes with complexities, such as potential setup costs, issues with borrowing, and the double taxation of profits.

Action Needed:

Given the substantial tax changes, it is crucial to evaluate your options now. Consulting a tax advisor is recommended to explore whether selling, transferring, or restructuring the property is the best course of action before the new rules take effect.